Business context and reporting period
Seacoast Banking Corporation of Florida’s unaudited Form 10-Q covers the quarter and nine months ended September 30, 2017. Comparisons are principally with the corresponding 2016 periods; balance-sheet comparisons are with December 31, 2016 unless noted. The company is a Florida-focused bank holding company. Results include GulfShore, acquired April 7, 2017. NorthStar and Palm Beach Community Bank acquisitions closed after quarter-end, in October and November 2017, respectively.
Financial performance and condition
Amounts are in millions, except per-share data and ratios.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net interest income | $45.7 | $37.4 | $128.1 | $102.2 |
| Provision for loan losses | $0.7 | $0.6 | $3.4 | $1.4 |
| Noninterest income | $11.4 | $10.0 | $31.8 | $27.9 |
| Noninterest expense | $34.4 | $33.4 | $110.7 | $100.6 |
| Net income | $14.2 | $9.1 | $29.8 | $18.4 |
| Diluted EPS | $0.32 | $0.24 | $0.70 | $0.49 |
- Management reported Q3 adjusted net income, a non-GAAP measure, of $15.1 million and adjusted diluted EPS of $0.35; nine-month adjusted net income was $38.1 million and adjusted diluted EPS was $0.90.
- Net revenue was $57.2 million for Q3, up 21% year over year; nine-month net revenue was $159.9 million, up 23%.
- Tax-equivalent net interest margin was 3.74% in Q3 versus 3.69% a year earlier and 3.84% in Q2 2017. The quarter-on-quarter decline reflected higher funding costs and the prior quarter’s $1.5 million of accretion from early payoffs.
- The Q3 GAAP efficiency ratio was 58.9%, versus 68.6% a year earlier; the adjusted ratio was 57.7% (non-GAAP). Nine-month GAAP efficiency ratio was 67.7%, versus 75.7%.
- No cash dividends were declared or paid in the periods shown.
Balance sheet, funding and credit
- Total assets were $5.34 billion, up 18.3% from September 30, 2016. Loans were $3.385 billion, up 22.2% year over year and 17.6% from year-end 2016; growth included the GulfShore acquisition and loan-pool purchases. Commercial real estate represented 47.3% of loans.
- Deposits were $4.113 billion, up 17.2% year over year. Management said growth excluding GulfShore and brokered CDs was modest. Brokered CDs totaled $281.6 million; deposits also reflected seasonal public-fund outflows.
- Cash and cash equivalents were $125.3 million at quarter-end. Nine-month operating cash flow was $48.4 million; investing cash outflow was $305.0 million; financing cash inflow was $272.2 million, including $304.0 million of net deposit growth and $55.6 million of net stock-offering proceeds.
- Borrowings included $142.2 million of repurchase agreements, $389.0 million of FHLB advances and $70.5 million of subordinated debt. FHLB advances were short-term, maturing within 30 days. The company reported $75 million of available unsecured lines and $815 million of collateral-based lines, subject to collateral values.
- Shareholders’ equity was $594.4 million. Regulatory capital ratios were above well-capitalized thresholds: consolidated CET1 12.32%, total risk-based capital 14.75%, and Tier 1 leverage 10.29%.
- The allowance for loan losses was $26.2 million, or 0.91% of portfolio loans excluding purchased loans, versus $23.4 million and 0.96% at year-end 2016. Nine-month net charge-offs were $271,000, compared with net recoveries of $2.321 million in the prior-year period.
- Nonperforming assets were $21.5 million, or 0.40% of assets, down from $31.2 million and 0.69% a year earlier. Nonperforming loans were 0.42% of total loans. Accruing troubled debt restructurings were $16.2 million.
Material changes versus the prior comparable period
- Net income rose 56% year over year in Q3 and 62% for the nine-month period; diluted EPS increased to $0.32 and $0.70, respectively. Growth reflected higher net interest income, loan growth and acquisitions.
- Assets, loans and deposits expanded substantially, partly from GulfShore and other acquired or purchased portfolios. The February 2017 public offering raised $55.7 million net for the company; GulfShore consideration included 2.63 million newly issued shares.
- Funding costs increased: Q3 total interest expense was $4.3 million versus $2.2 million a year earlier, while the reported rate on interest-bearing liabilities increased to 0.51% from 0.30%.
- Noninterest expense rose 3% in Q3 and 10% year to date. Merger, branch-reduction and other adjustment items affect comparisons; the Q2 2017 expense base also included substantial GulfShore merger costs.
- Credit metrics improved year over year, although the nine-month provision increased to $3.4 million from $1.4 million.
Outlook, management commentary and risks
- Management reaffirmed full-year 2017 adjusted EPS guidance of $1.28–$1.32. It expected tax-equivalent net interest margin in the mid-3.70% range in Q4 2017, rising to the high-3.70% range by Q2 2018, assuming no change in short- or long-term rates.
- Management anticipated deposits increasing at a 6% annualized rate and continued loan growth. It also expected efficiency-ratio improvement, targeting the low-50% range by the end of 2018, while planning approximately $4.5 million of 2018 investments in processes, risk management, technology, talent and analytics.
- Hurricane Irma caused about two weeks of business disruption. Management estimated an approximately $0.01-per-share impact, including waived fees, slower wealth activity and delayed loan closings, plus $0.4 million of direct expenses. It reported no meaningful facility damage and expected credit effects to be nominal.
- Management identified interest-rate, credit, real-estate, commercial real-estate concentration, liquidity, regulatory, cybersecurity and acquisition-integration risks. Its rate model estimated net interest income would increase 7.1% under a 200-basis-point rate rise over the next 12 months; results depend on modeling assumptions and actual conditions.
- Fair values assigned to GulfShore assets and liabilities were preliminary. NorthStar and Palm Beach Community Bank purchase accounting was incomplete at filing, and goodwill was expected. Management said legal proceedings were not expected to have a material adverse effect and reported no significant contingent-liability accruals.
- Management expected realization of the $44.0 million net deferred tax asset to be more likely than not. This judgment depends on future taxable income and tax-planning assumptions.
Important facts for investors to verify
- Reconcile adjusted earnings and efficiency measures to GAAP, and assess the recurring nature of merger, branch-reduction and other excluded costs.
- Track margin and funding-cost trends, including brokered-CD balances and rates, short-term FHLB maturities, and deposit growth excluding acquisitions.
- Review loan growth by category and concentration, particularly commercial real estate, and monitor allowance coverage, charge-offs, nonaccruals and acquired-loan performance.
- Assess integration, purchase accounting, expected synergies and costs for GulfShore and the post-quarter NorthStar and Palm Beach Community Bank acquisitions.
- Test management’s 2017 adjusted-EPS and margin outlook against actual results, rate movements, Hurricane Irma effects and planned 2018 spending.